How capital gains tax affects your investments and what can you do about it?

Investing can be a great way to grow wealth, but the returns are often impacted by one factor that many investors dread: Capital gains tax. Whether you're venturing into the world of the stock market or dealing with property sales, understanding this tax can significantly influence your investment strategies. This blog will break down how capital gains tax affects your investments, explain the recent Budget 2024 updates, and provide actionable tips to manage your tax liabilities effectively.

Understanding capital gains tax in India

Capital gains tax is applicable on the gains from the sale of a "capital asset." These assets include property, stocks, jewellery, patents, and more. The tax is classified into two categories:

• Short-term capital gains (STCG): Gains from assets held for less than a year.
• Long-term capital gains (LTCG): Gains from assets held for a longer duration, typically over a year for listed securities.

The tax is calculated based on the capital gains tax rate, which changes depending on the type of asset and its holding period.

Budget 2024 update: Key changes to note

The Budget 2024 introduced several pivotal changes to capital gains tax investment rules, effective from FY 2024-25. Here's what investors need to know:

1. Simplified holding periods:

• Assets are now classified into long-term and short-term based on two holding periods: 12 months and 24 months.
• For listed securities, the holding period is 12 months, while for other assets, it is 24 months.

2. Increased short-term capital gains tax:

• Taxation on short-term capital gains from listed equity shares and equity-oriented funds has risen to 20% from the earlier 15%.

3. Revised long-term capital gains tax:

• The exemption limit for LTCG on equity shares and related units has increased from ₹1 lakh to ₹1.25 lakh annually.
• The tax rate for LTCG has been increased to 12.5%, effective from 23rd July 2024.

4. Changes to indexation benefits:

Indexation benefits on long-term assets have been eliminated. However, taxpayers can opt for either:

• 12.5% tax without indexation, or
• 20% tax with indexation for real estate transactions before 23rd July 2024.

Capital gains tax on stocks and shares

For those investing in the stock market, understanding the capital gains tax on stocks is essential. Profits earned from stock trading or equity-oriented mutual funds are subject to specific tax rules:

• Short-term capital gains tax on shares: Profits on shares held for less than 12 months are taxed at 20%.
• Long-term capital gains tax on shares: Gains exceeding ₹1.25 lakh per year on shares held for over 12 months are taxed at 12.5%.

These rates highlight the importance of choosing the right holding period to optimise your returns.

How CGT impacts your investments

The capital gains tax investment burden can influence your financial goals in several ways:

• Reduced returns: Tax deductions can significantly lower your net profits, especially for frequent traders on a trading platform in India.
• Impact on long-term investments: With the removal of indexation benefits, long-term investors need to reconsider their strategies for property and other non-financial assets.
• Increased compliance: Filing accurate tax returns and understanding exemptions require additional effort and expertise.

Strategies to manage capital gains tax

The good news is that with the right approach, you can minimise your CGT liabilities and maximise your returns. Here are some effective strategies:

1. Utilise exemptions under Section 54: If you sell a property, reinvesting the gains in another house can help you claim exemptions under Section 54. The exemption is now limited to ₹10 crore.
2. Reinvest in specific bonds: Under Section 54EC, you can reinvest up to ₹50 lakh in bonds issued by NHAI or REC within six months of the sale to avail of tax benefits.
3. Invest in agricultural land: Exemptions under Section 54B are available for gains from transferring urban agricultural land, provided the proceeds are reinvested in new agricultural land.
4. Choose the right tax option: For real estate sold before 23rd July 2024, calculate your taxes using both methods (12.5% without indexation and 20% with indexation) to decide the most cost-effective option.
5. Opt for tax-advantaged investments: Certain trading platforms in India offer insights into tax-efficient mutual funds and investment products that match your financial goals.
6. Timing your sales: Holding assets until they qualify for long-term capital gains can reduce your tax rate. For example, holding listed stocks for over 12 months can save you tax under the revised rules.

Navigating capital gains tax on shares

Trading or investing in shares can be lucrative, but navigating the intricacies of capital gains tax on shares is crucial for success. To minimise tax liabilities, consider:

• Investing in tax-saving instruments like ELSS (Equity-Linked Savings Schemes).
• Timing your stock sales to fall within lower tax brackets.
• Utilising tax-loss harvesting to offset gains with losses in the same financial year.

The role of budget 2025 in investment decisions

The Union Budget 2025's potential tax incentives in sectors like infrastructure, technology, and ESG could attract significant foreign investment. Measures such as tax holidays, rationalised corporate tax rates, and accelerated depreciation on capital assets could create a competitive tax environment, encouraging multinational corporations to view India as a prime investment destination. Investors can optimise portfolios by focusing on high-growth areas supported by these strategic fiscal policies.

Take control of your investments today

Understanding capital gains tax and its implications is critical for every investor. The Budget 2024 updates bring new opportunities and challenges that require strategic planning. By leveraging exemptions, timing investments wisely, and choosing the right platforms, you can minimise your tax liabilities and achieve your financial goals.

Whether you're a seasoned trader or new to investing in the stock market, staying informed about CGT and related changes is essential. Make sure to consult a financial advisor to tailor strategies that align with your financial needs.

Tax planning is as crucial as investment planning. By staying informed and proactive, you can make the most of your investments and enjoy long-term financial growth. Take action now to secure a tax-efficient future!

FAQs

1. What is Capital Gains Tax in India?

Capital Gains Tax is a tax on the profit from the sale of a capital asset, such as property, stocks, or bonds. It is classified into two types: short-term capital gains (STCG) and long-term capital gains (LTCG), depending on the holding period of the asset.

2. How does the Budget 2024 affect Capital Gains Tax?

Budget 2024 introduces changes, such as reducing the holding period for listed securities to 12 months for long-term classification and increasing the tax rate for short-term capital gains on these securities to 20%. It also raises the LTCG exemption limit to Rs. 1.25 lakh while increasing the tax rate to 12.5%.

3. Can I avoid Capital Gains Tax on Stocks?

You can minimise or avoid Capital Gains Tax by taking advantage of exemptions, such as reinvesting the gains into another property under Sections 54 or 54F, or investing in specific bonds under Section 54EC. However, the options are subject to conditions and limits.